I had been planning on writing a different article this month, but clearly the global health and financial situation calls for a change. I had meant to focus on our legacy planning work but this is a good time to highlight our continued expertise in the world of insurance.
In these challenging times, we have been fielding some questions and concerns from clients with concerns around making their insurance premium payments. Some others have also reached out to ask how the investments in their cash value policies are doing. I’m writing this post to share where things stand now and hopefully provide some options if you are concerned about making payments to continue your coverage. There is some good news in here, so stick with me!
These are only general comments and the situation continues to change so please don’t hesitate to reach out. Depending on your specific situation, options and alternatives may already be available if you are faced with difficult decisions that could put your family at risk.
We are here to assist you any way we can. This would be either with our knowledge and experience or our broad network of professionals inside the industry and out. We may be able to provide a different perspective on the wave of information you are surely getting from both reliable and unreliable sources.
Or maybe it’s just to chat because you are stuck inside and looking to connect. In any case, we’d be happy to chat. Please reach out and book a time to chat:
Term Life Insurance & Living Benefits (Disability and Critical Illness Insurance)
If your payments are due monthly, you usually only have a one-month grace period when your coverage is maintained. There is some talk in the industry about extending the reinstatement period where you can restore your coverage non-medically, but you would have no coverage in the interim. Reinstatement or coming out of the grace period both also require paying back premiums in a lump sum, which might be tough.
If your payments are on an annual basis and the due date is approaching, you could consider switching your payments to monthly for the time being.
If this is your situation, reach out to have a strategic chat.
Whole Life & Universal Life
Since you decided to invest in a product with cash values, you may have some solid options to reduce your premiums. In addition to the options listed above, you could potentially:
- Make only the base premium payments and pause any additional optional deposits and resume later
- Have whole life policy dividends partially or fully pay the required premiums, also known as premium offset, if possible. This is an election that you can make annually.
- Consider whether you might be able to use the cash value to pay for a reduced insurance amount, known as reduced paid up insurance
I know these are complex and confusing options so reach out to discuss your situation.
Accessing Cash Value
Some of you may also have cash flow concerns that your cash value insurance could help solve. You may be able to access the cash value directly or through a loan.
Access Cash from Participating Whole Life
Kinds of Whole Life Cash Value
There are two kinds of cash value in a participating whole life policy that can be accessed:
- Basic Cash Value: this is guaranteed. It starts in year one or year seven, depending on the policy selected.
- Cash Value from Dividends: there’s no guarantee dividends will be distributed every year but once they are credited, their value is guaranteed or “vested.” Canada Life, for example, has distributed dividends every year since 1848.
Let me take a moment to highlight the term “vested.” This means that despite all the financial turmoil, the current values in your policy haven’t changed. This is why we most often consider whole life cash value to be a key part of the fixed income part of our client’s finances. We hope that this is at least some small comfort with all that’s going on in the world. For that reason, it can also make sense to rely on this cash value in times of need, rather than drawing from other investments whose values may have dropped drastically over the last few weeks.
How to Access Whole Life Cash Value
There are three ways to access the cash value:
- Perhaps the easiest: use a Policy Loan directly from the insurance company. The policy values can continue to grow as if there was no loan. However, any unpaid loans and interest will build and reduce the insurance benefit. Taking out the loan may incur tax, though repayments to the loan may have a net positive effect on tax.
- Maybe a little more paperwork, but sometimes better rates and less tax impact: a Collateral Loan. Third party lenders, such as banks, may lend up to 90% or even 100% of the policy’s cash value if you qualify. Most of these programs require income to qualify for the loan, but Equitable Bank has a program for ages 50 and up that can access up to 90% of the cash value without income verification. The policy death benefit would go to the bank to pay off the loan first and then any remainder to the existing policy beneficiary. Since it’s a third-party loan, there is no direct tax impact to the loan.
- Lastly, Full or Partial Surrender can entitle you to the policy’s cash surrender value. The withdrawal may have a taxable impact and will reduce the death benefit.
Access Cash from Universal Life
All the control and options available with Universal Life policies make it even more challenging to suggest options here, but there may be similar options to:
- Take a premium vacation should there be high enough cash values inside the policy.
- Take a collateral loan, though the amount that lenders will consider is usually lower than for Whole Life
- Take out funds from the cash value. In come cases this might reduce the total base death benefit on the policy and in others it may not.
With the added complexity here, I would definitely suggest we connect if you are considering these options.
We're here to help
Hopefully the options above have given you something to think about. We strongly suggest you contact us if you have concerns with your policies. We are open for business despite being out of the office. We could also help you consider alternatives before considering pulling funds out of retirement accounts. Leveraging your stable assets through a recovery might be a better fit depending on your situation.
So please feel free to throw something by us in the insurance area or another area needing attention in your finances, even if it's not in our wheelhouse. We have a strong network of other professionals who may be able to help if we can't